The disposition of these cases may significantly affect implementation, perhaps even the survival, of Obamacare...

On July 22, 2014, two federal appellate courts issued conflicting decisions regarding the IRS final rule published on May 23, 2012 (the “IRS Rule”), implementing the exchange-related tax credit provisions of the Affordable Care Act (“ACA”). This will likely lead to the Supreme Court again addressing a fundamental ACA provision. The disposition of these cases may significantly affect implementation, perhaps even the survival, of Obamacare.

Background

ACA Section 1401 provides tax credits for eligible taxpayers purchasing insurance “through an Exchange established by the State under [ACA Section 1311]” (emphasis added). ACA Section 1311 directs the states to establish health insurance exchanges. It does not refer to federally-facilitated exchanges. Under ACA Section 1321, if a state elects not to create an exchange meeting federal requirements, the federal government will “establish and operate” one in that state. Currently 16 states and the District of Columbia have established their own exchanges. Thirty-four states rely on federally-facilitated exchanges. The IRS Rule authorized tax credits for insurance purchased on state and federally-facilitated exchanges.

Both decisions addressed whether tax credits are available for residents in states that have federally-facilitated exchanges. The District of Columbia Court of Appeals said “no”; the Fourth Circuit Court of Appeals said “yes.”

Decisions

Both decisions addressed whether tax credits are available for residents in states that have federally-facilitated exchanges. The District of Columbia Court of Appeals (the “D.C. Circuit”), in Halbig v. Burwell said “no”; the Fourth Circuit Court of Appeals (the “Fourth Circuit”), in King v. Burwell, said “yes.” The decisions turned on readings of the relevant statutory language and application of a test derived from the 1984 Supreme Court case, Chevron U.S.A. v. NRDC.

The Chevron test is used to assess whether agency action, here the IRS, is within the scope of the agency’s authorization, here the ACA. The Chevron test has two prongs:

First, has Congress directly spoken to the precise question at issue? If Congress’ intent is clear, the court and the agency must give effect to that unambiguously expressed intent.

Second, if the statute is silent or ambiguous, is the agency's action based on a permissible construction of the statute?

The D.C. Circuit relied principally on the first prong, concluding that the specific language of Section 1401 was unambiguous: the IRS cannot provide tax credits in conjunction with federally-facilitated exchanges.

The Fourth Circuit weighed the conflicting arguments before it, placed Section 1401 in a broader context, and concluded it was ambiguous. Applying Chevron’s second prong, it emphasized that the applicable review standard is highly deferential, with a presumption favoring finding the agency action valid. In upholding the IRS Rule, the Fourth Circuit was “primarily persuaded by the IRS Rule’s advancement of the broad policy goals” of the ACA.

Employers operating in states with federally-facilitated exchanges would have a competitive advantage...

Potential Impact

If ultimately no premium subsidies are available in states with federally-facilitated exchanges, millions of individuals in those states will be subject to the individual mandate without access to tax credits to make coverage affordable. Some may risk penalties and cancel their coverage. Risk pools could thereby experience increased adverse selection and become economically untenable, jeopardizing the federally-facilitated exchanges and undermining key ACA benefits.

However, in those states employers subject to the ACA’s employer shared responsibility rules would have no exposure for employees who otherwise trigger assessable payments by receiving the tax subsidies. Assessable payments are triggered when an employee qualifies for a premium tax credit: no eligible employees, no liability for assessable payments, even if the employer offers no coverage.

For multistate employers, the penalties for offering unaffordable or inadequate coverage could be imposed only with respect to employees in states that establish exchanges. Employers operating in states with federally-facilitated exchanges would have a competitive advantage.

What Happens Next

Both cases were decided by three judge panels. Recourse to the full circuit bench is possible, especially where the matter is of exceptional public importance. It seems that the Administration will seek review before the full panel of D.C. Circuit judges.

If the two circuit courts agree, appeal to the Supreme Court is still possible, although then the Supreme Court may be inclined to take the case only if it sees the case as raising important policy issues (which may be the case). A Supreme Court decision is unlikely to be reached much before June 2015, and could be as long as two years away. For the immediate future, provided that the D.C. Circuit stays its decision, the IRS final rule stays in effect.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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